How to Endorse a Stock as Collateral

by Tim Plaehn

Use a separate form to transfer stock shares as collateral.

According to the Financial Industry Regulatory Authority website, offers of stock-secured loans come from a wide range of financial advisers, including stock brokers, insurance agents, accountants and attorneys. If you choose to put up some stock shares as collateral for one of these loans, the one thing you do not want to do is directly endorse any stock certificate that is part of the transaction.

Stock-Secured Loans

With a stock-based loan, you pledge shares of stock as collateral against the repayment of the loan. Typically you do not make payments until the loan is due in two to three years and any dividends paid on the shares go toward the interest and principal of the loan. Besides transferring your shares to the lender, you will sign a loan agreement that acknowledges that you are pledging the stock as collateral for the loan.

Stock Assignment Forms Avoid Mistakes

While it is possible to assign stock shares by endorsing the back of a stock certificate, a much safer approach is to use a separate stock assignment form. The lender for the stock-secured loan should provide an assignment form or you can get a blank form at a stock brokerage officer or bank branch. The stock assignment form requires the same information that you would put on the back of a stock certificate. The difference is that you can mess up an assignment form, throw it away and complete another correctly. A mistake on the back of a stock certificate raises significant problems.

Medallion Signature Guarantees

The transfer of stock shares should include what is called a medallion signature guarantee, which is completed when you sign the assignment form. You can obtain the medallion guarantee at a broker or bank where you have an established relationship. The medallion guarantee is not the same as a notarized signature, so make sure you get your signature properly verified on the stock assignment form.

Transferring Book Entry Shares

In most cases, stock shares are not held as certificates. Instead the shares are in electronic form, referred to as "book entry" in brokerage jargon. To assign your book entry shares, the lender will provide transfer directions. It is a good idea to call your broker to ask about procedures on his end. The loan pledge agreement and the stock assignment form should be enough to have the shares transferred out of your brokerage account and into the lender's, where the shares will be held until you pay off the loan.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.